The Two Types of Business Model Risks
There is a wonderful book “The Risk Driven Business Model” written by my Wharton Professor Serguei Netessine and INSEAD Professor Karan Girotra. The book is about how the key choices you make in designing your business model with either increase or reduce two types of business model risks.
The first one is Information Risk.
The authors write, “Defined simply, information risk is a feature of a business model that requires you to make decisions without sufficient information.” We will never have complete and perfect information. We need to learn to make decisions in the absence of such (complete and perfect) information. This is a skill that we all need to build.
Remember the “Why I Succeed” Nano.
Hint – I succeed because of the shots I miss.
And how do you build this skill?
By making as many decisions as possible without sufficient information.
The tool that I use starts by asking this question “What’s the worst that can happen if I were to do this?” I have even written a detailed post on this.
The objective when you make such decisions is not to be right but to be less wrong.
The second one is Incentive-alignment Risk.
This arises when the incentives imposed by a business model lead to actions that clash with the broader interests of a value chain.
The regulatory actions that we have witnessed since 2009 is a direct consequence of this risk. I am sure you understand this broadly. But understanding this foundationally and deeply is so critical for the future of your firm. Sadly, most experts in our industry/profession don’t understand this deep enough from a strategy and business model innovation perspective. They are still stuck on irrelevant things whereas these two risks are responsible for most, if not all, problems with existing business models.
What are you doing about these two risks in our business model?